UPDATE 1-UBS trader discussed "slush account" with Adoboli

LONDON, Oct 8 (Reuters) - A UBS trader raised the issue of a "slush account" in an electronic chat with accused fraudster Kweku Adoboli in March 2011, a London court heard on Monday.

Appearing as a witness at Adoboli's criminal trial, trader Darren Bailey said he was "genuinely shocked" by the comment he himself had made and did not know what he was referring to at the time.

Adoboli, 32, was arrested on Sept. 15, 2011, and blamed for losses of $2.3 billion. He has pleaded not guilty to two charges of fraud and two of false accounting.

The prosecution says Adoboli routinely exceeded his trading limits, booked fake trades into the accounts to mask his true positions, and held back some of the profits from his unauthorised deals in an illicit "umbrella" account.

The defence says Adoboli believed he was acting for the good of the bank and was open about his methods with many of his colleagues. His lawyers have read out numerous chats which they say show that he discussed the umbrella openly.

In one group chat from March 2011, read out in court, Adoboli and Bailey discussed that week's trading and Adoboli said that it had been "emotional".

"Have you used the slush acct (account)?" Bailey asked in response.

Bailey, who still works for UBS and had denied during the first part of his evidence on Friday that he knew anything about the umbrella, said he did not have an explanation for the comment.

"I am genuinely shocked by this. I don't know what the context to that could have been. I am genuinely surprised," he said.

Adoboli's defence lawyer Paul Garlick said Bailey had been "caught out" and suggested that the comment showed he had been aware of the umbrella.

In his evidence on Friday, Bailey had admitted that once, in June 2011, he had accepted an offer from Adoboli to "warehouse" a trade overnight.

This meant that on that occasion, a trade executed by Bailey was booked into Adoboli's book rather than his own.

Garlick said this was because Bailey was exceeding his limits and Adoboli was helping him out. Bailey denied this, saying he was nowhere near his trading limits.

Repeatedly pressed on why it had been necessary to warehouse the trade, Bailey said he could not remember.

Garlick put it to Bailey that the episode showed that there was a culture of rule-breaking among UBS traders. Bailey denied this, saying that the following day, his manager had reprimanded him and banned him from trading futures for three months.